By Rajaraman S

India Ratings and Research (Ind-Ra) has downgraded Hindustan Aeronautics Limited (HAL)’s fund-based working capital limit to ‘IND AA+’ from ‘IND AAA’. The Outlook is Negative. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-fund-based working capital limit

-

-

-

INR20.5

IND A1+

Affirmed

Fund-based working capital limit

-

-

-

INR4.50

IND AA+/Negative

Downgraded

Analytical Approach: Ind-Ra has classified HAL as a dependent public sector entity under its rating of public sector entities criteria. This is attributable to HAL’s strong strategic importance, and ability and willingness of sponsor (the government of India; GoI; Fitch Ratings Ltd Issuer Default Rating: ‘BBB-’/Stable) to provide extraordinary support.

The downgrade reflects deterioration of HAL’s liquidity positon and weakening of support from the sponsor, due to a decrease in receipt of gross advances and ballooning of receivables. The Negative Outlook reflects stagnant sales and uncertainty in liquidity position of the company arising from high receivables.

The rating action also takes into consideration a spike in receivables to INR98.45 billion in 1HFY19 from INR77.42 billion in FY18 (FY17: INR42.10 billion) and continuous fall in gross advances received from the Ministry of Defence amounting to INR260.99 billion from INR381.02 billion in FY14. This indicates weakening of support from the GoI.

KEY RATING DRIVERS

Weak Liquidity: HAL’s trade receivables were INR98.45 billion and trade payables were INR19.04 billion in 1HFY19. The cash and bank balance declined to INR65.24 billion at FYE18 (FYE17: down 16.4% yoy to INR111.21 billion) and further to INR7.25 billion at 1HFYE19 (1HFYE18: INR116.99 billion) as a result of pending receivables from the Ministry of Defence.

Rise in Debt: HAL borrowed an INR1 billion term loan on a sanctioned limit of INR10 billion in FY18 to fund the manufacturing of 162 light combat helicopters. The company used its non-fund-based facilities of INR10.25 billion till March 2018, against the sanctioned limit of INR20.5 billion. HAL availed a working capital facility from a consortium of banks to majorly meet its non-fund-based requirements by way of letters of credit and bank guarantees. HAL had INR352.54 billion worth of contingent liabilities and commitments in FY18 (FY17: INR271.73 billion) towards outstanding guarantees, and commitment and statutory dues such as sales and income tax. HAL began using its fund-based limit of INR2.88 billion from October 2018; its peak utilisation was INR21.80 billion during February 2019.

The company increased its working capital limit to INR73 billion on 25 February 2019 from INR60.50 billion on 25 January 2019 (prior to 25 January 2019: INR25 billion).

Public Sector Entity: The GoI owns 89.97% stake in HAL. Moreover, the company has strong linkages with the sovereign, given it undertakes manufacture, repair and overhaul of aircraft, helicopters and engines, primarily for the Indian defence forces. Ind-Ra considers HAL as a dependent public sector entity and expects the GoI to extend a high degree of support to the entity in the event of distress, if required. However, the stress in the liquidity during FY14-FY18 has created uncertainty in the degree of support to HAL by the GoI.

Strategically Important Entity: HAL is strategically important to the GoI. Any disruption in HAL’s operations either relating to aircraft building or repair could adversely affect the national security, as it has a near monopoly in India. HAL is a defence public sector undertaking under the Department of Defence Production, Ministry of Defence. The GoI periodically infuses equity in HAL (FY14: INR3.615 billion).

Control and Oversight: HAL’s chairman-cum-managing director is appointed by the GoI. HAL’s accounts are audited by a chartered accountant appointed by the Comptroller and Auditor General of India. HAL signs an annual memorandum of understanding with the GoI that sets its operational and financial performance targets.

Moderate Order Book: HAL’s order book includes deals for new aircraft and helicopters. As confirmed by the company, the order book as on 31 January 2019 was valued at INR620 billion, which is to be executed by FY22. HAL’s domestic sales remained at about INR118 billion, on an average, over FY14-FY18. HAL faces production constraints due to long gestation period of orders from its major customer. However, it benefits from high-value orders and advances. In FY19, HAL manufactured 41 new aircraft and 98 engines, and undertook overhaul of 213 aircraft/helicopters and 540 engines at its various sites. HAL produced 12 new advance light helicopters against the contract of 40, of which six were produced ahead of schedule for the Indian Army.

Dependence on Raw Material Imports: In FY18, the cost of materials and employee costs (49.06% and 26.95%, respectively) were the major components of expenditure. The cost of material was INR47.35 billion for 9MFY19 (1HFY19: INR28.70 billion, FY18: INR78.29 billion, FY17: INR84.01 billion) and employee cost was INR30.24billion, INR19.55 billion, INR43 billion, INR35.69 billion). The majority of its raw material requirements are met through imports (FY18: 81.92%, FY17: 86.49%). However, the proportion of imports has reduced to 81.92% in FY18 (FY14: 89.61%). As a prudent financial policy, adverse forex fluctuations on materials, if any, are passed on to the customers.

Moderate Margins: HAL’s operating margin was 30.76% in 9MFY19 (1HFY19: 32.83%, FY18: 26.57%, FY17: 26.26%). The EBITDA margin was above 22% on average over FY14-FY18. Net profit margin stood at 21.96% in 9MFY19 (FY18: 10.74%, FY17: 13.77%). The decrease in the net profit margin in FY18 was mainly due to higher tax expenses and increase in provisions (FY18: INR10.44 billion, FY17: INR8.12 billion). As per provisional FY19 financials, HAL’s turnover was INR194 billion. The revenue from operations for FY18 was INR185.19 billion (FY17: INR179.52 billion).


RATING SENSITIVITIES

Positive: An improvement in the liquidity profile and an increase in financial support from the GoI would lead to a positive rating action.

Negative
: Material changes to HAL’s strategic importance and substantial dilution in the government shareholding, if any, could result in the entity no longer being classified as a dependent public sector entity in which case may no longer be credit linked to the GoI rating. 


COMPANY PROFILE

COMPANY PROFILE

Incorporated in October 1964, HAL is the largest defence public sector undertaking under the Department of Defence Production, Ministry of Defence. The company is involved in designing, developing, manufacturing, repairing and overhauling of aircraft, helicopters, engines and related systems such as avionics, instruments and accessories.

FINANCIAL SUMMARY

Particulars (INR billion)

FY17

FY18

Revenue

 189.96

 192.80

EBITDA

 43.06

 42.97

Trade payables

 17.97

 16.66

Trade receivables

 42.10

 77.42

Operating income

 179.52

 185.19

Operating expenses

 132.38

 135.98

EBITDA Margin (%)

22.67

22.28

Operating Margin (%)

26.26

26.57

Debtors collection period (days)

85.60

152.58

Days payable outstanding (days)

49.55

44.71

Source: HAL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

2 April 2018

23 March 2017

30 March 2016

Non-fund-based working capital limit

Short-term

INR20.5

IND A1+

IND A1+

IND A1+

IND A1+

Fund-based working capital limit

Long-term

INR4.5

IND AA+/Negative

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Rajaraman S

    Associate Director
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401714

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121